Friday, July 21, 2006

Stagflation seems to be a hot topic lately. I guess everyone's looking around and seeing a return to the 1970s, or at least a lot of people are starting to draw parallels between that decade and the present. An article in The Australian looks at the economic situation in the US and argues that a coming stagflation will spell trouble for President Bush and his ally, Tony Blair (thanks again for the sweater, mate).From, "Honeymoon's over for Bush and Blair as stagflation threat looms": In the past three years the US has been enjoying an unusual combination of low inflation and rapid growth. This happy combination cannot continue much longer.

In the months ahead, either inflation will continue to accelerate or economic growth will have to slow abruptly, to the point where unemployment starts rising and businesses start going bankrupt.

US voters could soon get a taste of higher inflation and higher unemployment, bringing back memories of "stagflation", a simultaneous attack of stagnation and inflation, an ugly buzzword that has hardly been heard for 15 years. Oh, interesting to note that the author is not exactly buying into the US' inflation reporting either. See this tidbit: Inflation, far from being confined to a few rogue sectors such as energy and housing, is spreading rapidly through the US economy.

Indeed, the Fed's own calculations show that more than half the goods and services in the typical American's basket have risen by more than 3.5 per cent in the past 12 months. On the definition of prices used in Britain and Europe (which includes fuel but excludes housing), inflation in the US is now running at a truly alarming 4.8 per cent.

The Fed could, of course, keep changing its definition of core inflation. By removing from the consumption basket any item that is going up, a central bank can always prove that inflation remains under control. So whaddya think?